Commerce ratios

What are the profitability ratios?

- Gross profit ratio

- Net profit ratio

- Return on equity ratio

What are the efficiency ratios?

- Expense ratio

- Accounts receivable turnover ratio

What are the liquidity ratios?

- Current ratio (working capital ratio)

What are the solvency (gearing) ratios?

- Debt to equity ratio

Gross Profit Ratio

(gross profit/net sales) x 100

- Expressed as a percentage (the higher the % the better)

Gross Profit Ratio comment

Comment = For every $1 in sales, the business generates __ cents in gross profit. This is above the industry average of __% and therefore the business is more profitable than average.

Net Profit Ratio

(Net Profit/Net Sales) x 100

- Expressed as a percentage (the higher the % the better)

Net Profit Ratio comment

Comment = For every $1 in sales, the business generates __ cents in net profit. This is above the industry average of __% and therefore the business is more profitable than average.

Return on Equity Ratio

(Net profit/total equity) x 100

- Expressed as a percentage (the higher the % the better)

- This shows us how much the owner gets back on their investment in the business in a year.

Return on Equity Ratio comment

Comment = For every $1 invested, the owner is making __ cents in return. This is considered to be a good/bad investment as it is higher/lower than the current market interest rate of 4.35%

Expense Ratio

(total expenses/net sales) x 100

- Expressed as a percentage (the lower the % the better)

- Compare to given industry average or last years ratio.

Expense Ratio comment

Comment = For every $1 in sales, __ cents goes to expenses. This is higher/lower than [last years ratio/the industry average] of __ cents and therefore the business is more/less efficient at controlling costs.

Accounts Receivable Turnover Ratio

365 ÷ (net sales/debtors)

- This is expressed as days, the lower the better.

- It shows us how long it takes for a business to collect money from its debtors.

- Relate to industry average of 30-40 days or given credit terms

Accounts Receivable Turnover Ratio comment

Comment = It is taking the business __ days on average to collect money owed from debtors. This is inside/outside the credit terms of __ days, therefore the business needs to manage its debtors more efficiently/is managing its debtors efficiently.

Current Ratio (working capital ratio)

current assets ÷ current liabilities

- Expressed as a ratio (current assets : current liabilities)

- Current liabilities is always 1

- This ratio shows us the ability of a business to meet its short term debts

- 2:1 is generally accepted as a safe figure

Current Ratio comment

Comment = For every $ in current liabilities, the business has $_.__ in current assets to cover them. Therefore, the business is/is not liquid and can/cannot cover short term debts.

Only if above benchmark - However, the business is not using its cash efficiently and should put cash into assets earning greater returns, or reduce liabilities.

Debt to Equity Ratio

total liabilities ÷ total equity

- Expressed as a ratio (total liabilities : total equity)

- Total equity is always 1

- The lower the first number in the ratio, the safer it is for the business

- If the ratio is over 1:1, the business is highly geared and at risk of solvency (and vice versa)

Debt to Equity Ratio comment

Comment = For every $1 in equity, the business has __ cents in debt. The business is lowly/highly geared & is/isn't able to cover long term debt (solvent/risk of insolvency).